Bubble Update

I have spent much time in recent years studying the possibility of transformation, fundamental change, of healthcare and higher education. For many years, healthcare was the poster child for runaway costs. That is still an issue, but cost control has received quite a bit of attention.

Higher education is now the poster child for runaway costs. If current trends hold, tuitions and fees will top $100,000 annually at top universities within a few years. That is roughly twice the median per capita annual income in the US, before taxes. Across all taxes, 25% of that median income is consumed.

If you add in the living costs for the four undergraduate years, some students may graduate from college with $500,000 in student debt. They will need to pay something like $5,000 per month for the next 30 years to retire this debt. With the average starting salary of a college grad around $26,000 per year, the math does not work.

Let’s break down the $100,000. College involves roughly 8 months of 20 days per month, so that $625 per day, more than triple the median daily income. At 12 credits per semester, we get $4,167 per credit hour. The average adjunct faculty member teaching each class is making $3,000 per course. For 20 students in a three-credit class, the faculty member’s wage is $50 per credit hour. So, the university’s gross margin is 98.8%.

So, there ought to be a lot of money floating around, but there isn’t. Universities like healthcare providers always seem strapped for cash. Where does the money go? It is swallowed up by William Baumol’s cost disease. While salaries and other costs continually rise in education, healthcare, and government, there is no associated increase in productivity, which drives pay increases in other industries.

Education, healthcare, and government are seemingly immune to technology-enabled productivity increases. Worse yet, higher education in particular seems to endlessly expand services. At some universities, the number of administrators and staff, not counting faculty members, exceeds the number of students. The university has become a jobs machine. Healthcare has similar patterns. In some major cities, healthcare is the largest employer.

These jobs are not the ones you really want if you are saddled with $500,000 in student debt for your art history degree, but you take what you can get. Over time, the proliferation of these types of positions gets baked into education and healthcare budgets. They become vested interests that thwart fundamental change, at least until creative destruction completely changes the game.

Healthcare is primed for such fundamental change. It may take quite some time for it all to play out. Higher education, in contrast, is pretending that government-backed student loans will let them endlessly raise prices. But, the bubble is stretching. Once the terms of people’s student loans overrun the terms of their children’s student loans, collapse is inevitable.

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Stories of Change

My focus in this blog is fundamental change. In particular, I will write about fundamental change of complex organizational systems. The series of entries will report on a 20-year journey working globally with well over one hundred enterprises and several thousand executives and senior managers. I will also provide observations and comments on contemporary news and events.